Planning Short-Comings of the Ubiquitous Revocable Living Trust
Even clients with robust estate plans can face stumbling blocks as they progress through retirement. A revocable living trust, or RLT, is a central feature in most estate plans—serving to execute the client's wishes in terms of succession while avoiding the expensive and public probate process (all while the client retains control during life).Unfortunately, the RLT does nothing to help with a client's long-term care needs. Many estate plans gloss over the long-term care issue entirely. Long-term care in a nursing facility is the most significant expense that most retirees will ever face—and it's one that Medicare doesn't cover.Clients without long-term care insurance must exhaust private assets (including those in the RLT) before Medicaid starts picking up the nursing home bill. Fortunately, trust planning strategies do exist that can help clients simultaneously accomplish their estate planning goals and avoid draining their estates to cover long-term care costs.
Medicaid and Long-Term Care: The Basics
Medicaid coverage is only available to taxpayers with limited resources who satisfy certain means-based tests.Before Medicaid assistance becomes available, most clients are required to spend most of their assets to cover the cost of care—something that comes as a surprise to many. The asset limit can be as low as $2,000 (excluding some items, such as a primary residence and vehicle). When clients transfer assets into RLTs, they retain complete ownership and control over the trust assets.They can remove the assets from the trust at any time.They can sell the assets for any reason.They can change beneficiaries as they please.
As such, the law recognizes that the trust assets are entirely available to pay the owner's bills—including long-term care expenses.While the RLT can be an incredibly valuable part of a client's estate plan, clients who are concerned about long-term care should be advised that the RLT will not address those concerns.
Irrevocable Trusts and Medicaid Planning
For many clients, planning for long-term care means planning to qualify for Medicaid.Long-term care insurance can be incredibly beneficial—but it's also become more expensive and more difficult to qualify for in recent years. Clients who do not wish to use the bulk of their private assets to pay for nursing home care may benefit from an irrevocable trust strategy.
This type of trust is often called a Medicaid asset protection trust.With an irrevocable trust, clients release ownership of the assets that are transferred to the trust.They can't remove the assets from the trust at will.So, the assets are not counted when determining Medicaid eligibility.
That said, clients can appoint the trustee, such as an adult child or trusted relative (or even a professional, such as an attorney).In some states, the trust owner can even serve as trustee.Irrevocable trusts can be drafted to allow the trust owner to occupy real property held in the trust during their lifetime (and even receive income, although that income would be used to cover nursing home expenses).
The trustee can determine when trust assets are sold and transferred to the trust beneficiaries.However, once the assets are sold or transferred to trust beneficiaries, they have no legal say in how the beneficiary uses the assets or income.
Planning in Advance for Medicaid's Lookback Period
While transferring assets to an irrevocable trust is a valid (and legal) Medicaid planning strategy, it's also one that must be executed well in advance to work.Medicaid regulations contain a five-year lookback rule. Any transaction will be scrutinized if entered into within the five-year period prior to the date the client submits a Medicaid application.Any conveyance of assets (including via the trust strategy) could subject the client to a penalty period (assuming that the assets were transferred for less than fair market value).
The "penalty" is that no Medicaid benefits will be available during the period when the penalty applies, so that the client will be responsible for funding their own nursing care.
Conclusion
Using an irrevocable trust for long-term care planning is not always ideal—and it's important to consider all the implications.Transfers made to protect assets and preserve (or create) Medicaid eligibility can have a variety of consequences. Before entering any strategy (especially an irrevocable one), it's always important that the client consult experienced counsel so that they understand the potential implications of the transaction.